LIC PENSION FUND LIMITED. INTERNAL INVESTMENT GUIDELINES (Updated upto ) 1 Guidelines for investment in Debentures, Bonds 2 7

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1 LIC PENSION FUND LIMITED INTERNAL INVESTMENT GUIDELINES (Updated upto ) S.No. Particulars From Page No. To 1 Guidelines for investment in Debentures, Bonds Guidelines for investment in fixed deposits of Scheduled Commercial Banks Guidelines for stock selection and Investment in equity shares Guidelines for Investment in Government Securities and Related Investments Guidelines for Investment in Short-term Debt Instruments and Related Investments Guidelines for Investment in Alternate Asset Class Policy for churning of Debt Securities (Debentures and Bonds) and Strategies for Exit Policy for churning of Equity and Strategies for Exit D:\Abhyankar\PFRDA\Invt Guidlines\Misra\final Inv_Guide_Annexure_III_updated_ docx 1

2 [1] Guidelines for investment in Debentures, Bonds The internal guidelines for investment in Non-convertible Debentures, Bonds& Related Investments shall be as under: 1. All investments in Non-Convertible Debentures and Bonds shall be strictly in accordance with the instructions issued by PFRDA which are contained in the IMA {Investment Management Agreement dated 18 th April 2012 (NPS Scheme for Govt. Sector) & 25 th March 2015 (NPS Scheme for Private Sector), signed between NPS Trust and LIC Pension Fund Ltd.} and amendment in the guidelines as issued by PFRDA from time to time. The exposure limit under Debt Instruments & Related investment has increased from 40% to 45%. 2. The investment in listed (or proposed to be listed in case of fresh issue) debt securities issued by bodies corporate, including banks and public financial institutions (Public Financial Institutions as defined under Section 2 of the Companies Act, 2013) and term deposits of scheduled commercial banks shall not exceed 45%of the AUM of the respective fund in case of Government Schemes including NPS Lite, Corporate CG & Atal Pension Yojana. In C Scheme (Tier I and Tier II) the investment can go up to 100%. 3. The instrument under consideration for investment should have a maturity of not less than 3 years tenure. This tenure should be calculated from the date of investment to the call option date or maturity date whichever is earlier. 4. All investment decisions shall be taken by the Chief Executive Officer based on the unanimous recommendation of the Internal Investment Committee taking into account the IMA, instructions issued by PFRDA, NPS Trust, Board of Directors of the Company and Investment Management Committee from time to time. 5. The Investment Committee, while deciding the securities for investment shall bear in mind all the associated risks as detailed in the Risk Management Policy, apart from the yield. The Internal Investment Committee of PFM will give utmost importance to safety and security aspects. 6. The borrower/issuer of the instrument under consideration should be a Regulator (NHB, NABARD, EXIM Bank etc) or a scheduled commercial bank or a Public Sector Undertaking or a Multinational Corporation or a large Financial Institution including NBFCs or a large corporate house. 7. In case of corporate borrowers, the company issuing the instrument should be a Public Limited Company and its shares should be listed in any one of the stock exchanges in India. In case, the shares of the borrowing company are not listed, at least, it should be a subsidiary of a listed holding company, whose holding in the borrower company should not be less than 51% of the paid up capital of the company. Nevertheless, the instrument under consideration D:\Abhyankar\PFRDA\Invt Guidlines\Misra\final Inv_Guide_Annexure_III_updated_ docx 2

3 should be listed/proposed to be listed in case of fresh issue in WDM segment of NSE/ BSE. The Investment Management Committee of the Board can under exceptional circumstances relax this condition for a specific company where the instrument is AA+ rated by two rating agency. 8. LIC PFM shall invest the Trust funds only in companies, whose promoters /management are competent and have strong domain knowledge and track record. We shall avoid investment in companies, whose promoters/management do not have a good track record of being transparent to shareholders and have a history of not protecting the interest of small shareholders. 9. As far as possible, it should be ensured that the promoter/promoter group should not have got entangled in any corporate Governance issues. 10. The borrowing/issuing company should be a profit making one and should have earned a net profit in at least 3 out of 5 preceding accounting years, including the latest accounting year. Even in the years it has incurred a net loss, the company should have generated profit at PBDT level (PBDT level means Profit before Depreciation and Tax).* This condition of PBDT level can be relaxed in case of a new company which has shown net profits continuously during the latest 3 years. *PBDT level means profit before Depreciation and Tax. When the NCDs / NCBs are issued by a newly floated company whose Parent/Holding company is a listed entity belonging to BSE 100, the financials of the Parent / Holding company can be considered, if the instrument is Secured & rated AAA or AAA (SO) and any one of the following conditions is fulfilled. a) The issuer is a subsidiary of a holding company, with a holding of at least 75% of the equity share capital of the company. b) The promoter / holding company has given an irrevocable guarantee for the instrument issued by the company. However, in an exceptional case when the instrument is unsecured & comes with an irrevocable guarantee/comfort letter from the promoter of holding company, specific approval of Investment Committee has to be sought before such investment is considered. 11. The net worth of the company should be not less than Rs.500/- Crore. 12. In case of manufacturing companies, financial institutions and other companies classified as traditional in the aggregated matrix given by Stock Holding Corporation of India Ltd.(Aggregate of CRISIL and ICRA matrix), the instrument should have been rated AA by at least two reputed and SEBI approved rating agency such as CRISIL, ICRA, CARE, etc. Apart from the ratings by agencies, proper due diligence for assessment of risks associated with the securities should be done before investments. D:\Abhyankar\PFRDA\Invt Guidlines\Misra\final Inv_Guide_Annexure_III_updated_ docx 3

4 13. In case of non-banking financial companies classified as NPR in the aggregated matrix given by SHCIL, such rating should not be less than AA+ from at least two rating agency. Apart from the rating by agency, proper due diligence for assessment of risks associated with the securities should be done before investments. If the securities have been rated by more than two rating agencies, the lowest rating of all the rating shall be considered. 14. In case of banking companies: a. The bank should be a scheduled commercial bank as per RBI guidelines. b. The rating of the instrument should not be less than AA. c. The bank should have earned a net profit in the immediately preceding three financial years. d. The Capital to Risk Weighted Assets Ratio should be at least 9%. e. Net NPA as a percentage of net advances in the last financial year should be less than 4% f. The net worth should be at least Rs.500 Crore. 15. In case of manufacturing companies, it is desirable that a minimum Interest Cover Ratio of two times and a Debt Equity Ratio of 2:1 is maintained by the company. However, if the instrument is a secured one and rated at least AA+, the Internal Investment Committee can waive the debt equity and interest cover requirements for reasons to be recorded in writing. 16. In case of Non-Banking Financing Companies classified as NPR in the aggregated matrix of SHCIL, the capital adequacy ratio should be at least 12% and the net NPA should be not more than 2%. It is desirable that the instrument is secured. However, in exceptional circumstances, investment in unsecured instruments can be considered up to a residual period of 5 years with approval of the Investment Committee of the Board. For this purpose, the Investment Committee may grant relaxation for specific companies after considering the financials of the company and other risks. 17. If the company had issued a Non-Convertible Debentures/Bonds earlier and if we have subscribed to the same, the debt servicing track record should also be taken into account while taking the investment decision. 18. In case of privately placed Non-Convertible Debentures/Bonds, the LIC PFM shall subscribe only when there is a co-investor and LIC PFM s share is not more than 50% of their issue. For one to one placement of Non-Convertible Debentures and Bonds, we should have subscribed to any of the earlier issues of the company and our experience with the company in terms of debt servicing has been satisfactory. 19. All deals are to be done only at market levels. Comparison of the offered yield should be done with aggregate matrix of SHCIL as benchmark and the valuation should not be negative on the date of investment decision. If the valuation is negative, the yield should be compared with the FIMMDA rate and in the event the valuation is positive, decision can be taken on merits. This will prevent D:\Abhyankar\PFRDA\Invt Guidlines\Misra\final Inv_Guide_Annexure_III_updated_ docx 4

5 losing the opportunity to investment in reputed and good companies. Under any circumstances, the valuation should not be negative on the date of investment decision either with aggregate matrix of SHCIL or FIMMDA as stated above. However, this condition can be relaxed in case the issuer is a Govt., a Regulator (like EXIM Bank, NABARD etc.) or a PSU and rating is AAA. 20. All secondary market deals are to be done on case to case basis and all the criteria stated above should be fulfilled. 21. Investment in Zero Coupon Bonds with a residual maturity of not exceeding 5 years (Minimum of 3 years) can be considered, only if the issuer is a Bank or a Regulator or Public Sector Undertaking, provided that the instrument is rated at least AAA by two reputed Credit Rating Agency. 22. Investment in Perpetual Bonds (Basel III compliant Tier I bond) of scheduled commercial banks in the Public sector as well as Private sector as permissible under all schemes by PFRDA Investment Guidelines and provided they fulfill the following conditions, at the time of investment : a) The Networth of the Bank is Rs.10,000 Crore. b) The rating of the instrument shall be AA or above. The rating has to be from at least two credit rating agencies. c) The investment shall be in the schemes as permitted by PFRDA Investment Guidelines d) The total Investment in any year in the Additional Tier I Bond compatible under Basel III shall not exceed more than 5% of the investment under Corporate Bond Category. e) The portfolio invested in Basel III Tier I bonds, at any time shall not be more than 2% of the total portfolio of the fund. f) The Bank should have maintained a minimum Capital to Risk weighted assets ratio of 9% consistently during the immediately preceding 3 years or as stipulated by RBO from time to time whichever is higher. g) The Bank should have earned a net profit after tax during the preceding 3 years. h) The Bank should have declared dividend for the preceding 3 years. i) The Bank selected for Investment should not have regulatory or governance issues. j) The investment under such bonds can be made at a rate over and above of 100bps of Government Securities rate of the same tenure. k) All such investment shall invariably is to be reported to the Investment Committee following such investment in AT1 Bonds of scheduled commercial Banks. 23. Exposure and Prudential Norms: a. The investment exposure in an industry sector (classification as per Level - 5 NIC classification) for all classes of asset shall be restricted to 15% of all NPS schemes {Scheme E,C, CG, SG, NPS Lite, Corp CG& Atal Pension Yojana (APY)} portfolio taken together. Investment in D:\Abhyankar\PFRDA\Invt Guidlines\Misra\final Inv_Guide_Annexure_III_updated_ docx 5

6 Scheduled Commercial Banks FDs would be exempted from exposure to Banking sector. Exposure norms for Government Schemes& Scheme C (Tier I & II) The investment exposure in debt securities of all sponsor groups companies shall be restricted to 5% of the net worth of all the sponsor group companies or 5% of total AUM in debt securities (excluding government securities) whichever is lower in each respective scheme. The investment exposure in debt securities of a non-sponsor group shall be restricted to 10% of the net worth of all the sponsor group companies or 10% of total AUM in debt securities (excluding government securities) whichever is lower. 24. As and when there is a fall in the credit rating of the instrument, the exposure in the company shall be reviewed by the PFM. If the rating of the instrument falls below the investible grade (BBB-) a separate note shall be put up to the Investment Management Committee of the Board along with the recommendations of the Internal Investment Committee for taking an appropriate decision to continue or exit this investment. 25. Investment can be made in AAA rated Infrastructure Development Funds floated by reputed Financial Institution. Rating should be obtained from two rating agency. The total exposure in Infrastructure Development Funds can be upto a maximum of 1% of credit risk bearing fixed income instruments of individual government scheme and C scheme. The fund house should have experience in managing infrastructure funds. Investment can be considered after 50% of the Fund gets tied up. 26. NPS Funds shall not be used by the PF to buy securities/bonds held in its own investment portfolio or any other portfolio held by it or in its subsidiary or in its Sponsor. 27. Transfer of investments from one Scheme to another Scheme in the same PF, shall be allowed only if: Such transfers are made at the prevailing market price for quoted Securities on spot basis (Explanation: spot basis shall have the same meaning as specified by Stock Exchange for spot transactions) The Securities so transferred shall be in conformity with the investment objective of the Scheme to which such transfer has been made. 28. Investment in Rupee Bonds having an outstanding maturity of at least 3 years issued by institutions of the International Bank for Reconstruction and Development, International Finance Corporation and the Asian Development Bank. 29. Investment in the Units of Debt Mutual Funds as regulated by SEBI. 30. Investment in following infrastructure related debt instruments: D:\Abhyankar\PFRDA\Invt Guidlines\Misra\final Inv_Guide_Annexure_III_updated_ docx 6

7 a) Listed (or proposed to be listed in case of fresh issue) debt securities of Body Corporates engaged mainly in the business of development, or operation and maintenance of infrastructure, or development, construction or finance of low-cost housing. b) Infrastructure and affordable housing Bonds issued by any scheduled Commercial bank which meet the conditions specified in 14 above. c) Listed (or Proposed to be listed in case of fresh issue) securities issued by infrastructure debt funds operating as a Non- Banking Financial Company and regulated by RBI. d) Listed (or Proposed to be listed in case of fresh issue) units issued by infrastructure Debt Funds operating as a Mutual Fund and regulated by SEBI. 31. Investments have been allowed by PFRDA in Corporate Debt Securities with a minimum A rating or equivalent in the applicable rating scale subject to a cap on investments between A to AA- rated Bonds to be not more than 10% of the overall Corporate Bond Portfolio. PFMs will submit a quarterly statement on the investments made in securities which have a minimum rating of A and their performance including downgrades in this category, if any to NPS Trust for monitoring of such investments. This revision is applicable to both the referred investment guidelines for NPS Schemes viz. CG, SG, Corporate CG, NPS Lite, APY and C Tier I & II schemes. LIC PFL will continue to invest in papers with minimum credit rating AA by two rating agencies. 32. These guidelines shall be reviewed periodically, at least once a year. D:\Abhyankar\PFRDA\Invt Guidlines\Misra\final Inv_Guide_Annexure_III_updated_ docx 7

8 [2] Guidelines for Investment in Fixed Deposit of Scheduled Commercial Banks. Following guidelines are to be followed while investing in term deposit of Scheduled Commercial Banks: 1. While investing NPS Trust funds in Scheduled Commercial Banks, Investment guidelines as specified in Schedule II of the Investment Management Agreement has to be adhered. 2. All investments in debt securities (Public & Private) including term deposit of Scheduled Commercial Banks (issued as per the guidelines of RBI) should not exceed 45% of the total AUM under each fund at any given time. 3. All investment decisions shall be taken by CEO (Chief Executive Officer) of LICPF Limited on the basis of unanimous recommendation of Internal Investment Committee, which shall comprise of a minimum of three members approved by the board. 4. Investment in term deposits of Scheduled Commercial Banks shall be for a period of not less than one year. (As per IMA all deposits with a maturity term of less than 1 year shall be classified as a money market instrument). 5. The Scheduled Commercial Public Sector Bank selected for investment of term deposits should qualify the following criteria: a) The Bank should have earned a net profit after tax consistently during the immediately preceding three financial years. b) The Bank should have maintained a minimum Capital to Risk Weighted Assets Ratio of 9% consistently during the immediately preceding 3 year. c) Net NPA as a percentage of net advances in the last financial year should be less than 4% d) The net worth of the Bank should be at least Rs 500crore. 6. The Scheduled Private Sector Commercial Bank selected for Investment in term deposits should qualify the following criteria: a) The Bank should have earned net profit after tax consistently during the immediately preceding three years. b) The Bank should have maintained a minimum Capital to Risk Weighted Assets Ratio or Capital Adequacy Ratio of 9% consistently during the immediately preceding 3 year. c) Net NPA as a percentage of net advances in the last financial year should be less than 4%. d) The Net worth should be not less than Rs. 500 Crore. e) The maturity tenure should not be more than 5 years. f) The Bank selected for Investment should not have regulatory or bank governance issues (CDR Etc). 7. Any Investment in term deposit in any Schedule Commercial Bank by the respective fund manager will be based on the mandate approved by the Internal Investment Committee. Such mandate shall be reviewed at least once in a year. However, it should be ensured that the prescribed criteria for investment in fixed deposit are fulfilled in each case before taking the investment decision. The mandate approved by the Internal Investment Committee shall remain valid till it is replaced by a fresh mandate. D:\Abhyankar\PFRDA\Invt Guidlines\Misra\final Inv_Guide_Annexure_III_updated_ docx 8

9 8. While preparing the mandate, all scheduled banks as defined in second schedule of Reserve Bank of India (RBI) Act, (RBI includes only those banks in this Schedule which satisfy the criteria laid down vide section 46(6)(a) of the Act) may be considered for Investment. 9. As and when investment in term deposit is considered by the fund manager, he shall call for quotes from at least three banks listed in the mandate, including scheduled banks from private sector. The final Investment decision shall be based on the highest interest quote, received from such banks. If the Internal Investment Committee feels that the exposure in any bank has to be minimized taking into account the risk and other factors, the Committee can decide to distribute the proposed amount among two or three banks or even ignore the quotation of a bank which has given higher rate. In all such circumstances the reasons for doing so has to be recorded in writing. 10. Exposure and Prudential Norms: a) Exposure in term deposits of any scheduled commercial bank shall not exceed 5% of the total AUM of that Fund. b) Investment in term deposits of all the scheduled commercial banks shall not exceed 10% of the total AUM of that Fund. In case of C Scheme, the limit shall not exceed 20% of the total Fund. c) It is to be ensured that the gross investments under all classes of assets i.e. long term and short term in a Company or a Bank or any Entity including State Govt. shall not exceed 5% of the AUM of the fund calculated on market value basis. Prior approval of IMC has to be obtained for breaching this limit and shall be brought to the notice of NPS trust as per prescribed format. Investment in Fixed deposit in a single bank shall not exceed Rs.250 Crore for all schemes taken together. 11. In case of investment in fixed deposit already made, further renewal of the investment shall not be considered if the bank fails to fulfill any of the conditions stated above in the quarterly review and the bank has been removed from the panel list. In case of private sector banks, the option of premature exit can also be considered if situation so warrants. 12. Premature exit of an investment in fixed deposit can be considered if the reinvestment options are very attractive and will bring in substantial increase in future cash flow, taking into account the pre closure charges/ penalty. 13. These guidelines shall be reviewed periodically, at least once a year. D:\Abhyankar\PFRDA\Invt Guidlines\Misra\final Inv_Guide_Annexure_III_updated_ docx 9

10 [3] Guidelines for Stock Selection & Investment in Equity Shares. While considering investment of NPS Trust funds in equity shares and selecting the sector/ stock for investment, the LIC PFM shall ensure the following: 1. All investments in equity shares are to be made in accordance with the provisions contained in the IMA (Investment Management Agreement). 2. Investment of NPS Trust funds in equity shares can be done only if Market Capitalization of not less than Rs 5000 Crore as on the date of investment and in shares of Companies on which derivatives are available in Bombay Stock Exchange or National Stock Exchange or equity linked schemes of mutual fund or Exchange Traded Funds regulated by the Securities and Exchange Board of India, regulated by Securities and Exchange Board of India for NPS Schemes for Govt. Sector {including NPS Lite, Corporate CG Schemes& Atal Pension Yojana (APY)}and Private Sector (E-Tier-I and E-Tier-II). 3. The investment in equity shall not exceed 15% of the AUM (Asset under Management) of the respective fund on any given date. While this limit shall be strictly maintained at the end of the financial year. For E Scheme Tier I & II the same can be up to 100%. 4. The stock being considered for investment shall form part of BSE 200 Index, in addition to qualifying the conditions on derivatives as stated above. 5. LIC PFM shall invest the Trust funds only in companies, whose promoters /management are competent and have strong domain knowledge and track record. We shall avoid investment in companies, whose promoters/management do not have a good track record of being transparent to shareholders and have a history of not protecting the interest of small shareholders. 6. The company selected for investment should have earned net profit after tax consistently during the preceding three years and also should have paid dividend on equity shares during those three years. In the event, the stock do not meet the above stipulation but forms a part of NIFTY/BSE Sensex, it can be considered for investment based on company fundamentals and future prospect. 7. While the zone of selection of stock shall be confined to BSE 200 stocks, (Included in derivatives segment), the main focus will be on Nifty stocks. In any financial year, investment in Nifty stocks by a fund shall not be less than 75% of the total investment in equity by that fund during that year, calculated based on cost of investment. 8. All investment decisions shall be taken by CEO (Chief Executive Officer) on the basis of the unanimous recommendation of Internal Investment Committee, which shall comprise of a minimum of three members approved by the Board. D:\Abhyankar\PFRDA\Invt Guidlines\Misra\final Inv_Guide_Annexure_III_updated_ docx 10

11 9. Investment in equity shares shall be made by the respective fund managers only based on the mandate approved by the Internal Investment Committee. Such mandate shall be reviewed frequently; at least once during a month. The mandate approved by Internal Investment Committee shall remain valid till it is replaced by another fresh mandate. 10. While preparing the mandate, the Internal Investment Committee shall consider all the associated risks as contained in the risk management policy approved by the Board. 11. The Internal Investment Committee, among other things shall consider all the fundamental aspects and also the performance of the company vis-à-vis the Sector/ Industry group. 12. As every sector has its own ups & downs, the sector selected for Investment under Government Schemes shall be one which has outperformed/ likely to outperform the diversified Index i.e. BSE 200. Investment in stocks under E- Scheme should be made in stocks based on performance and proper shifting of investment between the stocks are to be made to protect the NAV. Entry and exit should be on dynamic basis. Entry at higher level within 3 months of sale is required to be justified. Stocks not performing in medium to long term can be exited with minimum profit after approval of Internal Investment Committee 13. For the purpose of evaluating the performance of a sector, the performance of that sector during the immediately preceding month shall be compared in relation to the diversified Index (BSE 200). Only those sectors, which have outperformed during the preceding month and those sectors which are likely to outperform during the month under review, (based on changes in the investment environment) shall be considered for investment. While selection of sector will be based on evaluation of performance of that sector during the latest month, the performance of the sector in the long term say one year shall also be evaluated to rule out any wind fall gain for that sector. However, if the political, economic and environmental factors have made a positive influence in any sector and that sector is likely to grow by leaps and bounds in near future, that sector can be considered for investment by Internal Investment Committee irrespective of the performance of the sector during the one year period. 14. Selection of a stock within a sector shall be based on the performance of that stock as compared to the performance of the sector as a whole. While the latest performance during the preceding month shall be the main criteria for selection, the performance of that stock during the immediately preceding 52 weeks shall also be considered for evaluating the consistency of performance of that stock. D:\Abhyankar\PFRDA\Invt Guidlines\Misra\final Inv_Guide_Annexure_III_updated_ docx 11

12 15. Stocks which are extraordinarily volatile and have a beta of more than 2shall be avoided as far as possible. 16. The Company selected for investment should not have entangled in any legal, regulatory or corporate governance issues (CDR etc.) which will have an impact on the market valuation of the stock of the Company. 17. The Company selected for investment should be either a PSU or a Bank or a Large Corporate. 18. In case of Corporate, the public shareholding shall not be less than 25% of the paid up capital of the Company. 19. No part of the NPS Trust fund shall be invested in the Equity shares/ Equity oriented investments of a private limited company. 20. The fund shall not subscribe to IPOs/FPOs of any Company. The fund also shall not purchase any shares through private placement or bulk or block deals. All purchase shall be through recognized stock exchanges only. 21. The Company shall not invest any part of its funds in convertible instruments and preference shares. 22. The Company also shall not consider any investment in derivative instruments like futures & options. 23. While the mandate shall be reviewed on monthly basis, during the currency of the mandate, if it comes to the notice of Internal Investment Committee that any particular stock which is currently undervalued, is likely to show an exceptional growth due to change of events like split, bonus, tax reliefs etc. These stocks may be added to the mandate with the unanimous approval of Internal Investment Committee after clearly recording the reasons in writing for such inclusion. 24. Exposure and Prudential Norms a) Exposure in any non-sponsor promoter company shall not exceed 10% of paid up equity capital of the group companies or 10% of the total Investment in equity relating to that fund for Government Scheme. For sponsor group the limit is reduced from is 5% for both group and fund exposure. For E-Scheme Tier I and Tier II Exposure in any non-sponsor promoter company shall not exceed 15% of paid up equity capital of the company or 15% of AUM whichever is lower. For investee company of sponsor group, the limit is 5% for both group and fund exposure. b) Exposure in any non-sponsor promoter group shall not exceed 10% of paid up equity capital of the group companies or 10% of the total investment in D:\Abhyankar\PFRDA\Invt Guidlines\Misra\final Inv_Guide_Annexure_III_updated_ docx 12

13 equity relating to that fund for Government Schemes. For sponsor group the limit is reduced is 5% for both group and fund exposure. Exposure in any non-sponsor promoter group shall not exceed 10% of paid up equity capital of the group companies or 10% of AUM for E Scheme Tier I and Tier II whichever is lower. For sponsor group the limit is reduced is 5% for both group and fund exposure. c) The investment exposure in an industry sector (classification as per NIC classification) for all classes of asset shall be restricted to 15% of all NPS schemes (Scheme E,C, CG, SG, NPS Lite, Corp CG) portfolio taken together. d) Any investment in Equity Mutual funds / ETFs will be made in a manner that the aggregate portfolio invested in such mutual funds shall not be in excess of 5% of the total portfolio of the fund at any point of time and the fresh investment in such mutual funds shall not be in excess of 5% of the fresh accretions invested in the year. 25. Stocks with low P/E, high dividend yield and other good fundamental may be considered for averaging if the stock has outperformed the corresponding sectoral index. 26. These guidelines shall be reviewed periodically, at least once a year. D:\Abhyankar\PFRDA\Invt Guidlines\Misra\final Inv_Guide_Annexure_III_updated_ docx 13

14 [4] Guidelines for Investment in Government Securities& Related Investments The maximum exposure in Govt. Securities& Related Investments is brought down to 50% from 55% for NPS Schemes for Govt Sector and for Private Scheme G (Tier I & II) upto 100% 1) Investment in the Units of Mutual funds set up as dedicated funds for investment in Government securities and regulated by the Securities & Exchange Board of India will be considered for investment in Govt Securities with in the overall limit of 50%.Provided that the portfolio invested in such mutual funds shall not be more than 5% of the G Sec in the concerned NPS Scheme of the pension fund at any point of time and fresh investment made in them shall not exceed 5% of the fresh accretions in the year. 2) Other securities { Securities as defined in section 2(h) of the Securities Contracts (Regulation) Act, 1956} the principal whereof and interest whereon is fully and unconditionally guaranteed by the Central government or any state Government. The portfolio invested under this sub category shall not be in excess of 10% of the total portfolio of the G-Sec in the concerned NPS Scheme of the pension fund at any point of time. D:\Abhyankar\PFRDA\Invt Guidlines\Misra\final Inv_Guide_Annexure_III_updated_ docx 14

15 [5] Guidelines for Investment in Short-term Debt Instruments and Related Investments While investing NPS Trust funds in Money Market Mutual Fund Schemes, LICPFM shall be guided by the provisions of Investment Management Agreement (IMA).Accordingly, investments in Money Market instruments including units of liquid mutual funds shall not exceed 5% of the Asset Under Management (AUM) of the respective Pension Fund under Government Schemes {including NPS Lite, Corp. CG Scheme and Atal Pension Yojana (APY)} and 10% of the Asset Under Management (AUM) of the respective Pension Fund under private schemes viz Scheme E, C & G (Tier & Tier II). The following instruments shall be classified as money market Instruments: 1. Liquid Fund Schemes of Mutual Funds 2. Certificate of Deposits 3. Commercial Papers 4. Short Term Fixed Deposits with Banks 5. Investment in Treasury Bills and Cash Management Bonds (CMB) Liquid Fund Schemes of Mutual Funds: As per IMA, every PFM shall invest their funds as soon as the same are made available to them by the trustee bank. LICPFM shall ensure that the funds received from NPS Trust and other sources are invested either on the same day or on the next working day when investment options are available. When the conditions prevailing in the Capital /Money Market are not conducive for investment in equity or long-term bonds, the funds available shall be parked temporarily in Liquid Fund Schemes as per the criteria given below. However, the funds can be allowed to be retained in the bank account till the next working day for deploying the same in securities where decision has already been taken. Criteria for selection of Liquid Fund Schemes of Mutual Funds: 1. The Mutual Fund (SEBI regulated) shall have an Average total assets under management {AUM (Debt & Equity)} for the most recent six-month period of, at least Rs.5,000 Crore. 2. The Mutual Fund should have completed a minimum of 3 years of existence. Relaxation can be considered in exceptional cases by the IMC where the fund house is sponsored by a Nationalized Bank or PSU provided that the fund house has completed at least 1 year. 3. The Scheme selected for investment shall belong to Liquid Fund Category only. Under liquid fund category preference shall be given to Institutional (includes Super Institutional) Plan- Growth Option. Retail Plan- Growth Option may be opted only when the funds available for investment are less than the minimum investment amount required under Institutional Plan. Under no circumstances, investment shall be made under daily/ weekly dividend / dividend re- investment option plan etc. 4. No funds shall be invested in liquid fund schemes through New Fund Offer (NFO). All investments shall be done in existing schemes where sufficient data is available to study the portfolio and performance of the schemes. D:\Abhyankar\PFRDA\Invt Guidlines\Misra\final Inv_Guide_Annexure_III_updated_ docx 15

16 5. The scheme selected for investment should be rated and should have earned the highest rating for e.g. ICRA A1+ mfs or CRISIL AAAmfs by at least two rating agencies namely ICRA/ CRISIL/ Fitch/ CARE. 6. The performance of the scheme shall be studied for a period of3 months, 6 months and 1 year. 7. The portfolio of the scheme shall also be studied, and due care shall be taken to ensure that appropriate mix of assets namely CD/ CPs/ Treasury Bills/ Cash and Cash Equivalents etc. are maintained. Schemes investing heavily on riskier assets shall be avoided. 8. The Risk grade classification of the scheme as per value research online shall be considered for short listing of the scheme. Caution shall be exercised with high risk grade schemes. 9. The average maturity of the fund portfolio should not be more than 60 days. SEBI has mandated 60 days average maturity for liquid fund schemes to be made effective from Sept The Fund selected for investment should have outperformed the benchmark index namely CRISIL Liquid Fund Index for at least two time periods namely 3 months, 6 months and 1 year as on the date of inclusion of the scheme in our eligible list. 11. A mandate shall be prepared taking into account the parameters such as the fund size of the scheme, return on the scheme for the time frame of 3 months, 6 months and 1 year, Avg. maturity of the portfolio, Performance over the CRISIL benchmark return for the time periods under study, No. of years in the business, risk grade of the fund as per Value Research etc. These funds shall be ranked based on the performance of during last 1 year. Due regard shall also be given to qualitative aspects such as the management of the Fund House, quality of services rendered by them to us, if already enrolled with us etc. 12. A performance list of all the empanelled mutual funds will be prepared on half yearly basis and reviewed. Currently, we have around 145 schemes under the liquid fund category for the Mutual Fund Industry as a whole. 13. There shall be an overall limit of Rs.50 Crore for investment per Fund House where AUM of the Fund House under liquid fund category is less than 3500 Crore and a limit of Rs.75 Crore where the AUM of the Fund House under liquid fund category is more than Rs Crore. This limit is the overall limit per Fund House for all funds of LICPFM taken together viz. Central Govt. Scheme, State Govt. Scheme and NPS Lite Scheme. Also, under no circumstances, our investment in liquid fund schemes of any Fund House shall exceed 5% of the average AUM of liquid fund schemes of that Fund House, as on the date of preparing the ranking list. 14. The performance list as per 12 above shall be placed before the Internal Investment Management Committee for approval. The list will be reviewed on a half yearly basis, based on their performance. 15. LICPFM will open an account/folio with eligible Mutual Fund for investments as and when they approach us for the same or on our own as per our requirements. D:\Abhyankar\PFRDA\Invt Guidlines\Misra\final Inv_Guide_Annexure_III_updated_ docx 16

17 Investment of funds in Liquid Fund Schemes on a day to day basis: 1. On a daily basis, while parking the funds with empanelled liquid fund schemes, we will assess the performance of top 5 mutual funds as determined in the latest half yearly assessment and place our funds accordingly. Preference to be given to schemes generating higher weekly returns. In case, there is a tie in returns thus generated by two or more MF schemes, one month, three months return shall be compared and so on and so forth up to 1-year return. 2. Generally, we carry out the transfer of funds to the Mutual Funds through RTGS mode. The cut off time for receipt of funds by the Mutual Fund is 2 pm to get the previous day s NAV for our purchases. In case of delayed receipt of payment after 2 pm, current day s NAV is made applicable. Many a times, the funds are received from CRA after 1.30 pm leaving us with less time to carry out RTGS transfer of funds before 2 pm. Our banker, Bank of India has laid down a cut of time of 12 noon for receipt of instructions by them for RTGS transfer of funds. During such times, we park the funds with such Mutual Funds having banking arrangement with Bank of India on the basis of performance within such Funds so that intra- bank transfer of funds can be affected by 2 pm and thereby avoid un-utilization of funds. In view of this facility offered by some of the Mutual Funds, there shall be an enhanced limit by 20% for such Mutual Funds. However, the enhanced limit shall be utilized only for delayed receipt of funds from CRA or other sources and not on normal course. In all such situation the reasons are to be recorded in writing. The excess investment shall be withdrawn and re invested in other MF schemes at the earliest possible opportunity so that the limits fixed for each Mutual Fund are adhered to and our funds starts enjoying better returns. Redemption of funds from Liquid Fund Schemes: 1. Circumstances under which funds are to be redeemed: a) When there is a fall in the credit rating of the Fund or any of the conditions listed above are breached. b) When the limits for exposure given in these guidelines are exceeded or likely to be exceeded. c) When opportunity for investment in equity or other long-term assets have come and thereby a need has arisen for redemption of funds from liquid Fund schemes. d) When the yield offered by some other Fund listed in the mandate is better than the current Fund/Scheme. e) When the fund has been deployed in low yielding investments due to late receipt of funds and there is a need for switching over to another Scheme giving better returns. 2. Criteria for withdrawal of funds: a) The Liquid Fund Schemes where we currently have holding shall be ranked in descending order of returns generated by them. b) Schemes giving lowest monthly returns shall be withdrawn first. If there is a tie in the returns generated by two schemes, we shall compare the 3 months returns of those schemes and schemes delivering the lowest return for 3 months period shall be withdrawn and so on & so forth D:\Abhyankar\PFRDA\Invt Guidlines\Misra\final Inv_Guide_Annexure_III_updated_ docx 17

18 comparison of returns shall be made upto 1 year in case of tie between two or more schemes. Churning of investments made in Liquid Fund schemes. Churning of investments made in Liquid Fund Schemes is essential with a view to increase the overall return on our portfolio. Our investment in Liquid Fund Schemes shall be studied at least on a weekly basis. Schemes may be listed out in the descending order of the returns generated by them (monthly return) and switching of investments from schemes giving lower return to higher return shall be carried out, having regard to the exposure limit. Competent Authority for investments and Redemption of funds: On a daily basis, decision for investment and redemption of funds from within the approved Mutual Fund schemes shall be unanimously taken by the Internal Investment Committee having regard to the guidelines set therein. Exposure Norms The exposure of LICPFM in all Money Market Mutual Fund schemes of a particular Fund House shall not exceed the limit fixed for each scheme i.e. 2.5% of the AUM of the Scheme for Govt. Sector NPS. NPS for Private Sector- The exposure of LICPFM in all Money Market Mutual Fund schemes of a particular Fund House shall not exceed the limit fixed for each scheme i.e. 5% of the AUM of the Scheme. This condition may be relaxed till the AUM under a particular scheme does not exceed Rs.100 Cr. Overall exposure to any Fund House under liquid fund category shall not exceed 5% of the AUM of liquid fund schemes managed by them or Rs.500 Cr. whichever is lower (excluding Private Sector NPS). In case of sudden flow of huge funds, the Internal Investment Committee shall exceed the prescribed limit for temporary parking of funds by a day or so after duly recording reasons for the same and reporting it to the NPS Trust to avoid idling of funds, in the best interest of the subscribers. Certificate of Deposits (CDs): When there is a liquidity crunch in the market thereby necessitating banks and select Financial Institutions to borrow money for short term at higher levels of interest, the surplus funds can be parked in Certificate of Deposits. This option can be considered even when there is high volatility in yield offered by Liquid Money Market funds of Mutual Funds. Criteria for investments of Funds in Certificate of Deposits: 1. Banks and select Financial Institutions as permitted by RBI issuing CDs must have continuous profitability for immediately preceding three financial years. 2. Banks and Financial Institutions shall have a minimum net worth of not less than Rs. 200 Crore. 3. Bank and Financial Institutions shall have a minimum Capital to Risk Weighted Asset Ratio of 9% and 12% respectively. D:\Abhyankar\PFRDA\Invt Guidlines\Misra\final Inv_Guide_Annexure_III_updated_ docx 18

19 4. Gross NPA ratio shall not be more than 2.50% and Net non-performing assets shall not be more than 2% of the net advances. 5. CD shall be rated by a reputed rating agency and the rating shall be P1+ by CRISIL or its equivalent by any other reputed credit rating agency (i.e. highest rating under short term category). 6. Purchase of CDs will be done in dematerialized form only. 7. The minimum yield on CD shall be: a) 1.00% above the Avg. performance of Liquid Fund schemes for the corresponding period and; b) 0.50% above the fixed deposit rates of corresponding tenure OR; c) 1% above the treasury bill yield of corresponding tenure OR; d) 1.50% above the CBLO/ REPO rate; as on the date of deal. 8. The outstanding/ residual tenure of CD issued by the Banks/ Financial Institutions shall be between 7 days to 1 year. However, the minimum term can be relaxed where the yield offered on investment is exceptionally high. 9. Valuation of the CD shall be done for the purpose of NAV calculation in accordance with the market practices and as per SEBI guidelines 10. The CD can be bought either from the Primary or Secondary market 11. Rollover of CD shall not be permitted. The Banks and Financial Institutions shall honour the CD on due date. Exposure Limit for Investment in CDs: 1. Exposure of LICPFM to Certificate of Deposits of any Bank or select FIs shall be restricted to 2% of the AUM of the respective scheme 2. Overall exposure to any Bank or FIs under CD for all schemes of LICPFM put together shall be restricted to 10% of the Bank/FI net worth. Competent Authority for taking investments decision The Internal Investment Committee shall unanimously decide on the investment proposal having regard to the guidelines set therein. Commercial Paper (CP): When there is high volatility in yields offered by MFs and the market condition for CDs are not attractive, investment in CPs of financially sound companies can be considered, if the yield offered by them is attractive. Criteria for investments of funds in Commercial Papers: 1. The tangible net worth of the Company issuing the CP shall not be less than Rs. 500 Crore as per the latest Balance Sheet. 2. The equity shares of the Company should be listed in NSE and/ or BSE. 3. The Company should have a good financial track record and should have earned a net profit after tax (PAT) continuously for the last three financial years. 4. The Interest cover ratio shall not be less than 2 times. Current ratio shall not be less than The CP shall be rated by at least two a reputed rating agencies and the rating shall be P1+ or its equivalent (i.e. highest rating under Short term Category). For investment in CP the lowest of the two rating shall be considered. D:\Abhyankar\PFRDA\Invt Guidlines\Misra\final Inv_Guide_Annexure_III_updated_ docx 19

20 6. Long term rating of the Company shall not be less than AA by any reputed rating agency. 7. CP can either be issued against working capital limits or on a standalone basis. However, CP carved out of working capital limits of the Corporate shall be preferred over CP issued on a standalone basis. 8. Purchase of CP will be done in dematerialized form only. 9. CP can be purchased from either Primary market or Secondary Market. 10. The outstanding/ residual tenure of CP shall be between 1 month to 1 year. 11. The minimum yield on CP shall be: a) 2.00% above the Avg. performance of Liquid Fund schemes for the corresponding period and; b) 1% above the fixed deposit rates of corresponding tenure OR; c) 2% above the treasury bill yield of corresponding term OR; d) 2.50% above the CBLO/ REPO rate; as on the date of deal. e) In case of CP issued by NBFCs higher yield differential may be asked for, depending on the market conditions. 12. The decision to invest in CP of a particular Company shall be taken on a case to case basis after studying the Company in detail about its financials, promoters background, promoters holding, key ratios, nature of business etc. Due care to be taken to ensure that the Company has not defaulted in any of its debt obligations or the Company should not have been admitted in CDR (Corporate Debt Restructuring Cell). 13. Valuation of the CP shall be done for the purpose of NAV calculation in accordance with the market practices and as per SEBI guidelines. 14. Rollover of CP shall not be permitted. The issuer shall honour the redemption on due date. 15. It shall be ensured that the issuer shall appoint a Scheduled Bank as an Issuing and Paying Authority (IPA). Exposure Limit for Investment in CPs: a) Exposure to a particular Company under CP shall be restricted to 2% of the AUM of the respective Scheme. b) Overall exposure to any Company under CP for all schemes put together shall be restricted to 5% of the net worth the Company. Competent Authority for taking investments decision The Internal Investment Committee shall unanimously decide on the investment proposal having regard to the guidelines set therein. Short Term Fixed Deposits of Banks: Investments in Short term Fixed Deposits can be considered only when the interest rates offered by the Banks are at least 1% more than the average returns on the Liquid Funds for comparable tenure. The term shall range from 7 days to 1 year depending upon the market conditions and our need for future investments. This option can be exercised when investments in other money market D:\Abhyankar\PFRDA\Invt Guidlines\Misra\final Inv_Guide_Annexure_III_updated_ docx 20

21 instruments are not possible due to delayed receipts of funds, especially at the close of the financial year. Criteria for investment in Short term Fixed Deposits upto1-year tenure: The criteria approved by the Board for investment in long term fixed deposits shall be made applicable for investments in short term deposits with tenure of less than 1 year. Investment in Treasury Bills and Cash Management Bonds (CMB) may be considered for investment under money market category. Exposure and Prudential Norms: Exposure in short term deposits of any scheduled commercial bank shall not exceed 2% of the total AUM of that Fund. The above guidelines shall be reviewed periodically, at least once a year. D:\Abhyankar\PFRDA\Invt Guidlines\Misra\final Inv_Guide_Annexure_III_updated_ docx 21